Despite a Worrying Economy, there is a Bright Spot for Investors

Despite a Worrying Economy, there is a Bright Spot for Investors

Stop talking the economy down, say our pollies…

…or at least the boffins in power.

According to Prime Minister Scott Morrison, there’s no need to panic about the health of Australia’s economy.

It’s fine. Just fine.

There’s absolutely no need to ‘fast track’ future tax cuts…

Oh, but just in case, here’s an extra $3.8 billion to build bridges and roads right now rather than in four years’ time.

No need to panic though…

Data says everything’s fine

We could go through the retail numbers.

Like the fact that retail spending only grew by 0.2% in September. The alarming problem in that data though, was that volumes dropped 0.1%. Meaning overall the amount we spent increased…but the amount we bought was down.

That’s telling.

It suggests that perhaps the cost of goods imported increased. Which in turn reflects the weakening Aussie dollar. In other words, the cost of goods increased, so we bought less.

Even though 55% of Australia’s gross domestic product comes from consumption…weak retail data should set off alarm bells. But let’s pretend two years of weak retail data is just a blip.

BUT, I hear you say, we have a bumper trade surplus.

That is true. Australia’s trade surplus is sitting at $7.9 billion.

A rare bright spot’ in a bleak economy noted Reuters in August.

But a trade surplus isn’t a reflection of a strong economy. Not when we need to import so many things…

A high — and growing — trade surplus means we are importing less than we are exporting.

It tells a similar story to complement the retail data…a high trade surplus reflects weak local demand.

Not all charts that rise are good news…

Australia trade surplus rises over the past five years

Source: Trading Economics

Pfft. Minor detail. The economy is fine.

Then there’s the unemployment numbers, resting at 5.3%. Now, years ago this figure would’ve been considered an economy at full employment.

Yet the Australian Bureau of Statistics (ABS) has tweaked the employment methodology so much that it bears little resemblance to reality.

Roy Morgan offers a much more accurate picture of unemployment. They reckon it’s sitting around 7.3%.

Yet back in July this year, ABC News noted that unemployment is only at this level thanks to the government.

From July 2018 to July 2019 some 310,000 ‘new’ jobs were created in the public sector…compared to the 54,000 in the private sector.

New jobs — public versus private

Source: ABC News

Furthermore, UBS economist Carlos Cacho said at the time, ‘Now that’s a quite a disconnect given the public sector only represents about 15 percent of total jobs in Australia.’

To really stick the boot in, allow me to show you this graph…

Government is spending more than private sector

Source: ABC News

Basically, people like you and me aren’t spending our money (we are the red column).

The reason why there is no ‘official’ recession is because government demand has significantly increased to offset the fall from the private sector.

But no, definitely, totally, not at all a reason to panic…

There is a small bright spot for investors

We’re three cuts into 2019, and there’s been no data set that confirms the private sector is spending.

Arguably, each rate cut makes people more concerned about the economy.

However, even our Prime Minister has said there is no reason to panic about the health of the Australian economy, he has still brought forward a bunch of government spending.

With the Australian Financial Review writing this, this morning:

Scott Morrison has all but slammed the door on fast-tracked tax cuts or other ”panicked reactions” in next month’s mid-year budget update, saying the government has already injected $9.5 billion of near-term stimulus into the economy since the May election.

Under external pressure to do more to stimulate the economy than he has already indicated, the Prime Minister will on Wednesday reveal that $3.8 billion of infrastructure spending has been fast-tracked over the next four years.

Think of this latest move as a way to prop up the Australian economy, without actually admitting the Aussie economy needs propping up.

In spite of this ‘nothing to see here folks, move along’ sentiment from the government, there is a small bright spot for investors.

There’s little money to make keeping cash at the bank. Bank stocks have an expensive year of retributions payouts ahead and many retail stocks don’t look healthy either. Investors might want to consider looking at stocks that are going to benefit from the increased government spending…

But not just the big names in the construction industry. What about the materials all these new roads and bridges will need?

Boral Ltd [ASX:BLD] — while it has disappointed shareholders for most of the year — could do well out of the few extra billion being spent. Already Boral scored the concrete and quarry project for the West Gate tunnel in Melbourne.

It will be a similar story for CSR Ltd [ASX:CSR] and a small company called Wagners Holding Company Ltd [ASX:WGN]. Both are in the concrete and quarry business…and the extra government money could flow into these stocks.

Not that anything is wrong with the economy though…

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia